Will the Plug & Play click?

With the Modi government deliberating over extending ´plug-and-play´ projects to infrastructure sectors like roads, ports, rail lines and airports, some uncertainty looms over the continuation of the PPP model. A majority of experts ardently hope the ´plug-and-play project´ won´t fizzle out the same way the PPP did after the initial burst of enthusiasm and success.

In the last 15 years, India has witnessed four government changes-NDA (1999-2003 & 2014-Present) and UPA (2003-2008 & 2008-2014)-and all of them ruled the biggest democracy in the world, i.e. India. Interestingly, both the governments had a different agenda while dealing with the most tedious sector in the country – infrastructure. By nursing this different agenda (s), what government has completely overlooked is the sordid state of the infrastructure sector. The earlier Public-Private Partnership (PPP) model, according to experts, has not worked well giving rise to non-fulfillment of targets, litigation and bad debt for banks.

While the PPP model may have not worked as it should have, despite this India has become the single largest PPP market in the world. In the 10th Five-Year Plan, private participation in PPP was 20 per cent, which increased to 37 per cent in the 11th Five-Year Plan, and is likely to be 50 per cent in the 12th Five-Year Plan. However, with the government´s proposal of auctioning projects in ´plug-and-play´ mode, the question arises: Will this be the end of PPP?

INFRASTRUCTURE TODAY spoke to various stakeholders within the infrastructure space and the results were bang on! Although most experts are comfortable with the ´plug-and-play´ model, they suggested that the government set ´timelines´ before announcing projects, does making then more realistic and bankable.

Under the ´plug-and-play´ model, major risks such as land acquisition, securing environmental and other clearances, and arranging coal or gas linkages would be taken care off by the government before awarding the projects to private developers. Through this mode, the government will then auction projects, further bringing transparency to the infrastructure space (taking a clue from recent coal auction). However, concerns over implementation of this model still remain as it will take at least a year to acquire land and get statutory clearances, while financial closure will take another year.

Plug it first
Most of the infrastructure players that we contacted advised the government to fix one major hindrance coming in their way, i.e. land acquisition. In fact, some of them even wanted the government to first utilise land available with major public sector undertakings (PSUs). Consider this: at present Coal India has a land bank of around 7 lakh acre, whereas railways have around 47,336 hectare making them the largest land bank available at this point of time, followed by major ports (2.64 lakh acre) and PSUs (2.5 lakh acre).

To this, Ravi Parmar, Chairman, Mumbai Port Trust (MbPT), says,´With the idle land in possession with us, we are planning projects catering to leisure, traffic, water transport, water sports, and entertainment needs.´

In addition, the Ministry of Shipping has plans of using the MbPT land bank for laying additional railway tracks between Chhatrapati Shivaji Terminus and Kurla.´We have also proposed to make use of this land to improve rail-road connectivity, which will in turn decongest cities,´ he said.

Meanwhile, the ministries of Defense and Railways have already made it clear that they will unlock the surplus land available with them and will make it available for development of infrastructure.´These available land parcels can be utilised for development of industrial and logistics parks etc.,´ says Atul Kulkarni, Advisor, Indian Ports Association.

A senior official from the Ministry of Railways said that since land available with the railways are spread in several pockets of different shades across India, it would be difficult to release the same for large-size infrastructure projects. A source from the Rail Land Development Authority stated,´Around 123 MFCs across 22 states are under various stages of the evaluation process where we have received bids.´

Will plug-and-play work?
INFRASTRUCTURE TODAY received a lot of mixed reactions to this question. While some were optimistic but doubtful, others have straight away written-off this concept. A former member of dissolved Planning Commission criticised the government saying that they should first resolve the issue of Land Bill in the Lok Sabha and then concentrate on plug-and-play.´If they (government) acquire the required support for current Land Bill Act, more than 50 per cent of the issues will get resolved automatically,´ he observed.´To be honest, the concept itself is a flop unless the government implements it with proper timelines,´ he further added.

B Manoharan, CEO, Lanco Infratech, says,´Unless and until the developer doesn´t get 100 per cent of land required for the project, it is inadvisable to start work on it. If he gets only 25 or 30 per cent land, he may face huge penalty in terms of cost overruns, leading to unviability of the project.´

On the other hand, to some extent, most of the experts have agreed to the former member of Planning Commission. They suggested that instead of making the entire process on sequential basis, the government should parallelly start the approval process and support infrastructure.

That said, Arvind Mahajan, Partner and Head of Infrastructure and Government Services, KPMG India, hailed the move but emphasized that the key lies in its implementation.´The government has to spend fair amount of time initially conducting feasibility studies and preparation required to incubate before they put out the bids for the private sector,´ he said.

To this, Ramesh Bawa, Managing Director & Chief Executive Officer, IL&FS Financial Services Ltd, says,´In the entire process of plug-and-play, the government must set simultaneous timelines for environment clearance and for land acquisition, where the required noti¡fication of land should be before project bidding stage.´

Meanwhile, the plug-and-play model has everything that a private player can look forward to. With plug-and-play model, a private player can get most of the required pre-approvals and supporting infrastructure.

Meanwhile, Pratyush Prashant, Advisor – Project Finance and Transaction, MCC, fears that although the concept is helpful, it puts a lot of pressure on the government. As far as environment clearances are concerned, the government is set to launch standardised guidelines for environmental impact studies of industrial and infrastructure projects. A move that could crunch the time it takes to receive an environmental approval by up to two years and accelerate project timelines. However, the move doesn´t guarantee an environmental approval, but shortens it out. The Ministry could still reject a project on the basis of the environmental impact report; only, now the process of conducting that study and filing the report can happen much faster. A previous attempt in 2009 to standardise guidelines went nowhere.

The guidelines will be sector specific, to the cement industry, steel industry or others… with around 30-35 in total. However, there could still be exceptional cases, implying that these could require individualized guidelines.

Experts are of the opinion that now it is time for the current government to develop more decision-making capabilities to streamline and fix impediments related to the infrastructure sector. But the question remains, is the government up for the challenge or are they directionless?

Bankable play
Experts suggested that through plug-and-play mode, government should establish the bankability of projects. Often, bankability is established by designing projects in an out-of-the-box way. Out-of-the-box thinking is not government´s cup of tea, given that Ministries and/or Department administration sectors work in a straitja¡cketed manner. Meanwhile, through this mode the government also needs to avoid procurement strategies, which either encourages excessive risk taking or are inimical to project outcomes.

According to Mehul Sukkawala, Credit Analyst, Standard & Poor´s,´Companies are likely to consider new projects only after they can sense the operating environment in India, which is improving at the ground level.´ He added,´They would also need to be confident that current investments are likely to generate good cash flows before committing fresh investments.´

Meanwhile, Hari Sankaran, Vice Chairman & Managing Director, IL&FS Ltd told,´If the implemen¡tation of projects is to be taken to the next level, a more imaginative and integrated mechanism will need to be devised to support project design based on outcomes without multiple organisations/departments and over¡lapping decision making being involved at the same time.´

Citing a cautious note, Rakesh Singh, Group Head – Investment Banking, Capital & Commodity Markets, HDFC Bank, said´When a promoter of the project fails to repay the debt to the bank, it causes non-performing assets within the banking system. Such situations also lead to the failure of the promoters in meeting the return expectations of their shareholders, which has a direct bearing on market capitalisation of the borrower and their ability to raise funds in the capital markets to complete these projects.´

Ground check
It is now time to do some ground check as far as project delays and cost overrun is concerned. In December 2014, 127 out of 251 projects, were delayed with respect to original schedule, and 24 projects have reported additional delay vis-a-vis the date of completion reported in the previous month. The additional delay is in the range of 1 to 96 months in respect of projects relating to railways, power, steel, road and petroleum sectors. Out of the 127 delayed projects, 32 projects have overall delay in the range of 1 to 12 months, 25 projects have delay in the range of 13 to 24 months, 37 projects have delay in the range of 25 to 60 months and 33 projects have delay of 61 months and above.

Total original estimated cost of these 251 projects was Rs 7 lakh crore and their anticipated completion cost is likely to be Rs 9 lakh crore, which reflects an overall cost overrun of Rs 1 lakh crore (23.10 per cent higher than the original cost). The expenditure incurred on these projects till December 2014 is Rs 4 lakh crore, which is 42.40 per cent of the anticipated cost of the projects.

Out of the 251 projects, 3 projects are ahead of schedule as per the original timeline, while 52 projects are on schedule and 127 projects are delayed. Brief reasons for time overruns as reported by various project implementing agencies are delay in land acquisition, forest clearance, delay in supply of equipment, fund constraints, geological surprises, equipment erection, geo-mining condition, shortage of labour, inadequate mobilization by the contractor, contractual issue, ROU/ROW problems, law and order situation, etc.

The railway sector has witnessed maximum project delays due to land acquisition. Out of the 83 projects that have been reported, 21 projects are delayed. During the month, project ´Bankura-Damodar (GC), SER´ reported an additional delay of 24 months due to delay in land acquisition.

In the road sector, 23 out of 37 projects are delayed. During the month, 10 projects have reported additional delays in the range of 1-12 months. The projects-Jammu-Udhampur of NHAI has reported additional delay of one month; six-laning of Krishnagiri-Walajhapet Section on NH-46; and two-laning with paved shoulders of Multai Chhindwara Seoni section-have reported additional delay of three months each due to delay in land acquisition. The projects-Ghaziabad-Aligarh on NH-91 and Cuddapah-Mydukur-Kurnool-have repor¡ted additional delays of 4-5 months respectively, due to delay in land acquisition. Gujarat/Maharashtra Border, Surat-Hazira Port section, and Indore-Jhabua-Gujrat/MP have reported additional delays of six months each, due to delay in land acquisition and fund constraints. Pune-Satara, NH-4 has reported additional delay of 12 months due to delay in obtaining forest clearance; And Srinagar to Banihal project has reported additional delays of 12 months due to delay in land acquisition. Also the project of six-laning of Chandikhol-Jagatpur-Bhubaneswar has reported additional delay of 12 months, however no specific reasons have been reported by the project implementing agency.

Last year, delays in land acquisition and statutory approvals cost road projects heavily. Against the target of 6,300 km of road construction works under various schemes of the Ministry of Road Transport and Highways during the current year, only 3,038 km was constructed till January 31, 2015. Out of 17 highway projects awarded by NHAI in 2013-14, work started in case of 15 projects, which is about 88 per cent of the total projects awarded, although progress has been recorded at 40-50 per cent. In 2012-13, out of 11 projects awarded by NHAI, the Letter of Award for one project was canceled while, in 2011-12, similar Letters of Award were either terminated or canceled for 26 out of 48 projects.

That said, to what extent these plug-and-play move would be able to fill up the huge infrastructure deficit, only the future will tell. The way the Land Acquisition Amendment Ordinance is being held up in Parliament by the opposition and the slow-moving government machinery (to do the advance groundwork in the ´plug and play´ model) leaves one a bit skeptical, at the ground reality. Hence, the government needs to devise mechanisms by which individuals who have taken decisions in government are protected. If the decision was legal and the officer felt that at the time that it was the right thing to do, then they should be immune from action.´The quicker we empower the government to take decisions boldly, the quicker will we see the benefit on the ground,´ sums up Sankaran.

INFRASTRUCTURE TODAY solutions

• Instead of sequential-based approvals, the central govern¡ment should start parallel approval and physical activities.
• Pension funds are quite keen to invest in ´plug & play´ projects. Given the requirement of funds to build infrastructure, ´plug & play´ is an important milestone to achieve and if the govern¡ment can work towards making it mandatory, most infra¡structure projects could be funded easily.
• The government shoud set timeline for approval process. Environment clearance should be within 30 days, land acquisition and financial closure in six months and parallel activities should take place in building supporting infrastructure.
• Building up of basic and related infrastructure for the project should be part of the bid document.
• Clearances should be subject to submission of all the relevant documents from the private players.
• The government should refrain from making mere announcements without physical stock of the ground reality.

RAHUL KAMAT